2000 Changes
Cash Method of Accounting Allowed for Qualifying Taxpayers
An accounting method is a set of rules for determining how and
when to report income and expenses. The most commonly used methods
are the cash method and an accrual method. Generally, if you
produce, purchase, or sell merchandise in your business, you must
keep an inventory and use the accrual method for purchases and
sales of merchandise.
For tax years ending on or after December 17, 1999, the IRS has
simplified the bookkeeping requirements for qualifying taxpayers.
If you are a qualifying taxpayer, you can now choose, even if you
produce, purchase, or sell merchandise in your business, to:
- Use the cash method of accounting, and
- Not keep an inventory.
Qualifying taxpayers. You are a qualifying taxpayer only
if you meet the gross receipts test for each tax year ending after
December 16, 1998. To qualify, your average gross receipts for the
3-tax-year period ending with each test year must be $1 million or
less. For example, you must test 1998 and 1999 to see if you
qualify to use the cash method and not keep an inventory for 2000.
You qualify if your average gross receipts for 1996, 1997, and
1998 are $1 million or less (1998 test) and your average gross
receipts for 1997, 1998, and 1999 are $1 million or less (1999
test). A tax shelter cannot be a qualifying taxpayer.
If you did not own your business for all of the 3-tax-year
period, include the period of any predecessor. If your business
has not been in existence for 3 tax years, base your average on
the period it has existed.
Not keeping an inventory. If you choose to not keep an
inventory, you will deduct the cost of the items you would
otherwise include in inventory in the year you sell the item, or
the year you pay for them, whichever is later. You deduct the cost
of merchandise purchased for resale that you sold during the year.
If you are a producer, you may use any reasonable method to
estimate the raw material in your work in process and finished
goods on hand at the end of the year to determine the raw material
used to produce finished goods that were sold during the year.
Changing methods. If you qualify and want to change to
the cash method, you must file Form 3115, Application for
Change in Accounting Method. You must follow the provisions in
Revenue Procedure 99-49 in Cumulative Bulletin 1999-2 for an
automatic change in accounting method. Those provisions also apply
if you no longer want to keep inventories. You may file one Form
3115 for both changes.
More information. For more information, see Revenue
Procedure 2001-10 in Internal Revenue Bulletin 2001-2. For more
information on accounting methods, see Publication
538, Accounting Periods and Methods.
Installment Method of Accounting Allowed for Qualifying
Accrual Method Taxpayers
Before December 17, 1999, qualifying accrual method taxpayers
could report sales or other dispositions of property on the
installment method. For sales of certain property occurring after
December 16, 1999, accrual method taxpayers were prohibited from
using the installment method.
This prohibition has been repealed, retroactive to December 17,
1999. Qualifying accrual method taxpayers can use the installment
method to report sales and other dispositions of property as if
the prohibition had never been enacted.
Standard Mileage Rate
If you use your car for business, you can figure your deduction
for business use based on either your actual costs or the standard
mileage rate. For 2000, the standard mileage rate for the cost of
operating your car, including a van, pickup, or panel truck, is
increased to 32 1/2 cents a mile for all business miles.
Car expenses and use of the standard mileage rate are explained
in chapter 4 of Publication
463, Travel, Entertainment, Gift, and Car Expenses.
Meal Reimbursements for Employees Subject to "Hours of
Service" Limits
For 2000 and 2001, you can deduct 60% of the reimbursements for
meals your employees consume while away from their tax home on
business during, or incident to, any period subject to the
Department of Transportation's "hours of service"
limits. The percentage gradually increases to 80% by 2008. For
more information, see chapter 13 in Publication
535, Business Expenses.
Corporate Contributions of Computer Technology and Equipment
A corporation (other than an S corporation) may take an
increased deduction for donations of qualified contributions of
computer technology or equipment to an eligible donee. The
following changes apply to contributions made after 2000.
- Public libraries are added to the definition of an eligible
donee.
- Qualified contributions may now be made up to 3 years
(instead of 2 years) after the date the corporation acquired
or substantially completed the construction of the donated
property.
- A new rule applies to donations of computers reacquired by a
manufacturer. See section 170(e)(6)(D) of the Internal Revenue
Code.
- The provision for such contributions of computer technology
and equipment is extended to tax years beginning before 2004.
Depreciation and Section 179 Deduction
Depreciation limits on business cars. The total section
179 deduction and depreciation you can take on a car (that is not
a clean-fuel car) you use in your business and first place in
service in 2000 cannot exceed $3,060. Your depreciation cannot
exceed $4,900 for the second year, $2,950 for the third year, and
$1,775 for each later year.
For information on the increased limits for clean-fuel cars,
see chapter 4 in Publication
946, How To Depreciate Property.
Increased section 179 deduction. The total cost of
section 179 property that you can elect to deduct is increased
from $19,000 to $20,000 for 2000. For tax years after 2000, this
amount will increase as shown below.
|
Maximum |
| Tax Year |
Deduction |
| 2001 and 2002 |
$24,000 |
| After 2002 |
25,000 |
For more information on the section 179 deduction, see chapter
2 in Publication
946, How To Depreciate Property.
Like-Kind Exchanges Using Qualified Exchange Accommodation
Arrangements (QEAAs)
The like-kind exchange rules generally do not apply to an
exchange in which you acquire replacement property (new property) before
you transfer relinquished property (property you give up).
However, if you use a qualified exchange accommodation arrangement
(QEAA), the exchange may qualify as a like-kind exchange. For more
information, see chapter 1 in Publication
544, Sales and Other Dispositions of Assets.
Basis of Stock Affected By Assumption of Liabilities
If your exchange of property (or property and money) for stock
is not taxable, the basis of the stock you receive is generally
the adjusted basis of the property (plus the amount of money, if
any) you transferred. Increase this amount by the amount of any
gain you recognized on the exchange. Decrease this amount by any
cash you received, the fair market value of other property you
received, and any loss recognized on the exchange. Also decrease
this amount by the amount of any liability the corporation assumed
from you, unless payment of the liability gives rise to a
deduction when paid. Further decreases may be required for the
assumption of liabilities after October 18, 1999, if the basis of
the stock would otherwise be higher than its fair market value on
the date of the exchange and the corporation assuming the
liability did not acquire in the exchange either substantially all
of the assets or the trade or business with which the liability is
associated.
The basis of any other property you receive in addition to the
stock is its fair market value on the date of the exchange.
Self-Employment Tax
The self-employment tax rate on net earnings remains the same
for calendar year 2000. This rate, 15.3%, is a total of 12.4% for
social security (old-age, survivors, and disability insurance) and
2.9% for Medicare (hospital insurance).
The maximum amount subject to the social security part for tax
years beginning in 2000 has increased to $76,200. All net earnings
of at least $400 are subject to the Medicare part.
Farm Income Averaging
You may be able to use a negative taxable income amount for a
base year when figuring your tax on Schedule J (Form 1040), Farm
Income Averaging. For details, see the 2000 instructions
for Schedule J. For general information about farm income
averaging, see Farm Income Averaging in chapter 4 of Publication
225, Farmer's Tax Guide.
Electronic Filing for Certain Partnerships
Partnerships with more than 100 partners are required to file
partnership returns electronically for tax years ending on or
after December 31, 2000. If your partnership return is not filed
electronically, you may be subject to penalties for failure to
file. However, you may be able to obtain a waiver due to hardship.
See section 301.6011-3(b) of the regulations and Announcement
2000-101 in Internal Revenue Bulletin 2000-52.
Reporting Canceled Debt
Beginning January 1, 2000, an organization that lends money as
a significant part of its trade or business must now report any
canceled debt to the IRS. For example, this applies to finance
companies and credit card companies (whether or not affiliated
with financial institutions). For more information on reporting
cancellation of debt, see the 2000 Instructions for Forms
1099-A and 1099-C.
New Form 8869 To Elect Qualified Subchapter S Subsidiary
Treatment
Parent S corporations can use the new Form 8869, Qualified
Subchapter S Subsidiary Election, to elect to treat one or
more of their eligible subsidiaries as a qualified subchapter S
subsidiary (QSub). The election results in a deemed liquidation of
the subsidiary into the parent company. Following the deemed
liquidation, the QSub is not treated as a separate corporation.
All of the subsidiary's assets, liabilities, and items of income,
deduction, and credit are treated as those of the parent. For more
information, see the instructions for Form 8869.
OID List Now Available From IRS Website
The original issue discount (OID) list that appears at the end
of Publication
1212 is no longer available on the electronic bulletin board.
You can now download it with the rest of Publication
1212 from our website at www.irs.gov. Go to the Forms
and Publications page and select Forms and Publications by Date
or Forms and Publications by Number. Then select Publication
1212 from the list. Also, be sure to select file format,
"SGML."
For information on original issue discount and the list of
original issue discount instruments, see Publication
1212, List of Original Issue Discount Instruments.
Employment Tax Exclusion for Educational Assistance Program
Benefits
The exclusion from wages for benefits you provide to an
employee under an educational assistance program was scheduled to
expire for expenses paid for courses beginning after May 31, 2000.
It has been extended to include benefits for expenses paid for
courses beginning before January 1, 2002. For more information
about this exclusion, see chapter 2 in Publication 15-B, Employer's
Tax Guide to Fringe Benefits.
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